Larry Kudlow ponders the death of Democratic Capitalism at Newsmax.com (http://tinyurl.com/cprfqa). This begs the question: What is Democratic Capitalism?
If it is meant, as Kudlow apparently intends, to be a form of political-economic system, the term is a complete oxymoron. Democracy is a political system of mob rule. Whoever has the most votes, wins. Under pure Democracy, there are no limits to what the majority mob can do. It is for this reason that the founders of the United States created a Constitutional Republic and not a Democracy. The founders knew the evils of unrestrained Democracy and created a constitution which protects (with some imperfections) individual rights.
Capitalism is the economic system which protects personal property rights -- the individual owns the means of production and each individual determines how they will dispose of the fruits of their production. (Fascism allows private ownership of the means of production but government control of the fruits of production. Socialism has government control of the means of production.) So, what does it mean to have the means of production or the fruits of production subject to the will of the majority? It certainly cannot mean that the property rights of production or its bounty is 100% protected as the property, by right, of the owner. After all, the majority can simply pass a law to seize any portion of that property up to and including complete expropriation and to put the property to any use that it wills.
I'm sure many would consider Mr. Kudlow a conservative. What he wishes to accomplish by using an oxymoronic term is not clear in the article as its theme is that Obama is destroying the capitalism aspect of the U.S.'s mixed economy. However, there can be only one explanation: He uses the term because he wishes to retain the escape clause that whenever laissez-faire capitalism has results that he does not like, that he can rally the support of a majority of the citizenry to violate someone's property rights to affect an outcome that would not otherwise be earned nor deserved.
Thursday, April 23, 2009
Wednesday, April 8, 2009
Economics, Math & Politics
Imagine Jane goes shopping for jewelry and finds a nice gold chain necklace. The jeweler informs Jane the chain is a beautiful piece and worth $1,000. Jane has only $50 in cash. The jeweler arranges financing for the remaining $950. Jane leaves the store proudly wearing her new necklace.
Four months later, Jane unfortunately loses her job and can no longer afford the $100 monthly payment on the gold necklace. She visits her neighborhood pawn shop to sell the necklace. The proprietor appraises the necklace and informs her that it is worth $2 as it is made of cheap lead covered by gold paint. Flabbergasted, she watches as he uses a knife to scrape away some of the gold paint to reveal the lead. Jane leaves the pawn shop dejected and confused as to how she could have possibly overpaid for the necklace and wondering how she can ever pay back the loan.
Some time after arriving home, Jane is struck by an epiphany. If she can manufacture $600, she can pay off the loan including the interest. Taking the last $20 bill from her purse, she makes enough copies to create $600 in counterfeit 20s. She sends the money to the loan company.
Does any of this sound familiar? Well, it should. This is exactly what the U.S. government is doing, By inflating the supply of dollars, the Federal Reserve is attempting to replace the wealth that was destroyed by the bursting of the housing bubble. That wealth was destroyed because people paid more for homes than what those homes were worth just as Jane's wealth was ruined because she overpaid for a piece of jewelry. There is a key difference. Poor, desperate Jane was arrested for counterfeiting currency (a form of fraud). Ben Bernanke's actions and those of the U.S. government are not punished for inflating the dollar. Every person that has dollar denominated savings is a victim of the inflation. A value destroyed cannot be restored by substituting something that has no value backing it. Dollars that are created out of thin air, not due to the production of anything of value, serve a single purpose: reducing the value of all dollars that were earned through the production of value. A fiat currency depends on the trust of people using it as the medium of trade that it can be traded for something of tangible value. When the fiat currency is inflated, that trust is undermined as there is no certainty of value from which it was created.
Four months later, Jane unfortunately loses her job and can no longer afford the $100 monthly payment on the gold necklace. She visits her neighborhood pawn shop to sell the necklace. The proprietor appraises the necklace and informs her that it is worth $2 as it is made of cheap lead covered by gold paint. Flabbergasted, she watches as he uses a knife to scrape away some of the gold paint to reveal the lead. Jane leaves the pawn shop dejected and confused as to how she could have possibly overpaid for the necklace and wondering how she can ever pay back the loan.
Some time after arriving home, Jane is struck by an epiphany. If she can manufacture $600, she can pay off the loan including the interest. Taking the last $20 bill from her purse, she makes enough copies to create $600 in counterfeit 20s. She sends the money to the loan company.
Does any of this sound familiar? Well, it should. This is exactly what the U.S. government is doing, By inflating the supply of dollars, the Federal Reserve is attempting to replace the wealth that was destroyed by the bursting of the housing bubble. That wealth was destroyed because people paid more for homes than what those homes were worth just as Jane's wealth was ruined because she overpaid for a piece of jewelry. There is a key difference. Poor, desperate Jane was arrested for counterfeiting currency (a form of fraud). Ben Bernanke's actions and those of the U.S. government are not punished for inflating the dollar. Every person that has dollar denominated savings is a victim of the inflation. A value destroyed cannot be restored by substituting something that has no value backing it. Dollars that are created out of thin air, not due to the production of anything of value, serve a single purpose: reducing the value of all dollars that were earned through the production of value. A fiat currency depends on the trust of people using it as the medium of trade that it can be traded for something of tangible value. When the fiat currency is inflated, that trust is undermined as there is no certainty of value from which it was created.
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